Forensic & Investigating Accounting 409 Exam 2

Explain about a lawsuit against an expert for negligence.

A lawsuit against an expert for negligence is one type of tort action. A negligence claim has a shorter statute of limitations than a breach of contract action. In order to prove negligence, a plaintiff must show (a) a duty was imposed on the expert in favor of the plaintiff, (b) the expert violated that duty, (c) the plaintiff suffered damages, and (d) the expert's breach was the proximate casue of the damages to the plaintiff. Experts have a duty to perform their services with care, skill, reasonable experience, and faithfulness. Because an expert possesses speical auditing, accounting, or valuation skills, he or she must exercise the average degree of skill, care, and diligence exercised by members of the accounting profession in the same or similar locality.

What are the lost profit methods

Before and after method Yardstick method But for Method Direct Method Combination Method

Antitrust laws were enacted to: a. Hold down company profits. b. Put nasty executives in jail. c. Eliminate anti-competitive practices. d. All of the above.

C

If a person is totally disabled in a job-related accident, the time period used in the analysis of lost wages is: a. The victim's stated time to expected retirement. b. Age 65. c. The victim's expected worklife. d. Age 62. e. None of the above.

C

Qui tam suits are brought by: a. The government against violators of the Federal False Claims Act. b. A corporation against another corporation under the Federal False Claims Act. c. A private citizen on behalf of the federal government. d. Employers against former employees.

C

When computing damages in a wrongful discharge case, the cost of job-related expenses: a. Should be added to the damage estimate. b. Should be ignored. c. Should be subtracted from the damage estimate. d. Could be added or subtracted from the damage amount depending on the circumstances of the case e. None of the above.

C

Which statement is false? a. Digital evidence is akin to fingerprints in the courtroom. b. The residuum rule is that no finding may be supported solely by hearsay evidence. c. If you examine the check amounts on 10,000 random checks, the number 1 will appear as the first integer about 21 percent of the time. d. Most often no transaction is recorded for kickbacks. e. All of the above are true.

C

Which statement is false? a. Independence from a client is not required when a CPA performs litigation services without a related attestation service. b. Accountants are sometimes appointed by the court as a special master or court-appointed expert. c. Independence is a factor used to determine whether a CPA performing litigation services has a conflict of interest. d. Any actual conflict of interest should be disclosed. e. None of the above is false.

C

Which statement is true? a. The Frye standard is used in federal courts. b. The Daubert rule is not used in state courts. c. The Frye standard may be used in some state courts. d. North Carolina follows the Frye rule. e. None of the above is true.

C

Yardstick Method

Compare Sales or sales growth of the company to other companies or to other industry averages

What is not direct evidence? a. A lay witness testifies. b. An expert witness testifies. c. The gun used in the murder. d. Hearsay testimony by a lay witness. e. None of the above.

D

When computing the future wage loss in the wage loss damages section, the expert should consider: a. Expected future wage growth over some relevant time period. b. Discounting future wages back to the present using an appropriate discount rate. c. Lost household services costs. d. Providing for expected wage growth and providing for discounting expected future wages back to the present using an appropriate discount rate. e. None of the above.

D

Which statement about witness immunity is false? a. A lawsuit against an expert for negligence is one type of tort action. b. A negligence claim has a shorter statute of limitation than a breach of contract action. c. A claim for breach of a contract generally is brought in a state court. d. Communication made in a judicial proceeding carries an absolute privilege against civil suits for damages. e. None of the above is false.

D

Which statement is false about Benford's Law? a. There is an approximate 4.6% chance that the first digit in a number will be a 9. b. There is about a 19% chance that the first digit in a number will be a 2. c. There is an approximately 9.7% chance that the first digit in a number will be a 4. d. There is about a 17% chance that the first digit in a number will be a 6. e. All of these statements are true.

D

Which statement is false? a. Usually the technical rules of evidence do not apply in administrative proceedings. b. The burden of proof in a criminal trial is normally beyond a reasonable doubt. c. The Fourth Amendment rights apply in a criminal trial. d. In a criminal trial, the prosecutor's discovery is not limited. e. None of the above.

D

Out of Pocket Method

Difference between Actual value and the actual value conveyed (Selling price-MV)

Much of the work for forensic accountants occurs in what stage?

Discovery

What is a red flag of kiting? a. Frequent deposits and checks in the same amount. b. Large deposits on Fridays. c. Short time lag between deposits and withdrawals. d. Only a and c. e. Items a, b, and c.

E

Which is not a Daubert factor? a. Can the theory be or was the theory tested? b. Was the theory subject to peer review? c. There is general acceptance. d. Known or potential rate of error of the method. e. All of the above are Daubert factors.

E

Which is not one of the Daubert factors? a. Whether the theory existed before litigation began. b. Whether the theory or technique in question can be and has been tested. c. The theory's known or potential error rate. d. The theory has attracted widespread acceptance. e. All are Daubert factors

E

Which technique is considered to be an "off-book" fraud? a. Skimming. b. Unrecorded sales. c. Understated sales. d. Theft of incoming checks. e. All of the above.

E

During a 12-week period, Bargain Discount Store had its highest weekly store operating costs of $400,000 and its lowest weekly store operating costs of $380,000. Sales volumes for these two weeks were $2,500,000 and $2,000,000 respectively. The estimated variable cost per sales dollar using the high-low method is: a. $0.04 per sales dollar. b. $0.10 per sales dollar. c. $0.05 per sales dollar. d. $0.16 per sales dollar. e. None of the above is correct.

A

Georgetown Company's weekly store operating costs for a 10-week period had a value of $300,000 and a low value of $260,000. Sales volumes for the two weeks were $4,000,000 and $3,200,000 respectively. The estimated variable cost per dollar of sales using the high-low method is: a. $0.05 per sales dollar. b. $0.08125 per sales dollar. c. $0.075 per sales dollar. d. $0.1067 per sales dollar.

A

If a regression analysis of store operating costs showed an "a" value of $12,000 and a "b" value of -$0.036, that would indicate that: a. The variable costs of the store appear to be inversely related to the store's sales. b. The fixed costs were negative. c. The regression makes no sense. d. As sales go up, store operating costs go up as well. e. None of the above.

A

In a personal injury case, the time period covered by the damage period is typically: a. Determined by the circumstances of the case and the time period during which the victim is affected by the injury. b. Fixed by statutory law. c. Covered by the contract. d. Provided by various government publications.

A

In antitrust cases, forensic accountants may be asked to evaluate whether or not a company: a. Engaged in predatory pricing. b. Sold its products for a loss. c. Engaged in any illegal accounting practices. d. Violated the Foreign Corrupt Practices Act.

A

Plaintiff GG Company convinced the court that JJ Company had engaged in antitrust actions that had caused GG serious financial damages. As part of GG's expert's damage testimony, it was shown that, during the 18-month time period covered by the case, GG Company's sales had fallen from an average of $400,000 per month to $300,000 per month. In addition, GG Company's profits had gone from an average of $40,000 per month to an average of a loss of $20,000 per month. Given this information, what is GG Company's damages in the case? a. $1,080,000. b. $1,800,000. c. $720,000. d. $360,000. e. None of the above is correct.

A

The method of lost profit damages calculation that is best for mature businesses is: a. The "before-and-after" method. b. The "yardstick" or "benchmark" method. c. The "but-for" method. d. All of the above. e. None of the above.

A

When measuring lost profits or other damages, it is necessary for the plaintiff to: a. Attempt to mitigate its damages. b. Show that the defendant's actions clearly call for punitive damages. c. Prove that fraud was involved in the case. d. Prove that there was no liability in the case.

A

When using the "cost of the next best alternative" in estimating damages in an intellectual property case one of the major challenges is a. determining what the next best alternative is. b. determining the actual value of the patented item. c. finding information technology that fits the cost measurement process. d. all of the answers above are correct.

A

Which item is not required in an expert's report? a. List of cases that the expert has testified or been deposed in the past 10 years. b. All opinions to be expressed. c. The exhibits to be used. d. List of all publications within the past 10 years. e. All of the above.

A

Which statement is true? a. Generally, non-expert witnesses are not permitted to give opinions. b. An expert has to testify from personal knowledge. c. Evidence of liability insurance may not be admissible in federal court. d. Custom and practice may not be used to authenticate business records. e. None of the above is true.

A

You should trace bank transfers for the latter part of an audit period and the early part of the subsequent period to determine whether a. The cash balances were overstated because of kiting. b. The cash receipts journal was held open for a few days after the end of the year. c. Any unusual payments to or receipts from related parties occurred. d. The last checks recorded before the year-end were really mailed by year-end. e. None of the above.

A

Explain the best evidence rule.

Under the best evidence rule (also referred to as the original writing rule), to prove the contents of a writing, recording, or photograph, the original writing, recording, or photograph usually must be presented. The best evidence rule historically required the original documents be produced, rather then "secondary" evidence, including oral testimony. Historical rules permitted "duplicate originals" when a copy was executed and intended to have the same effect. Then came typewriters, and carbons became duplicate originals. Photocopies never were duplicate originals, however. They were just copies. Today the rule is influenced by practicality and is often governed by statute. For example, usually a computer printout is admissible as an "original," provided that it is authenticated and a foundation of accuracy is laid.

What is a special master?

Accountants sometimes are appointed by a court as a master to assist the court in some matter (e.g., to determine certain facts or compute damages). They also may be appointed to act as the court's representative (referred to as a special master) in a particular transaction. The powers and duties of masters and special masters depend on the terms of the order making their appointment and applicable court rules. The compensation paid a master or special master is set by the court and paid by the parties or out of any fund or subject matter of the litigation.

Explain the hearsay rule.

As a general rule, hearsay is not admissible as evidence in a legal proceeding. The reason for excluding hearsay - which is an oral or written assertion (or nonverbal conduct intended as an assertion), other than one made by the declarant while testifying at the trial or hearing, offered in evidence to prove the truth of the matter asserted - is that such statements are considered untrustworthy. Whether a statement has been offered to "prove the truth of the matter asserted" has been one of the most frequently litigated issues in the law of evidence. Most of the time, a statement is easily recognizable as hearsay, and the real question is whether one of the exceptions applies. A good lawyer often can get hearsay into the courtroom. An expert witness can testify as to hearsay.

A person finds land, buys it, increases the price, and sells it to his company. What is this scheme? a. A ghost scheme. b. Land flip. c. Ponzi scheme. d. Bid rigging. e. All of the above.

B

Building up balances in bank accounts based upon floating checks drawn against similar accounts in other banks is best called: a. Skimming. b. Kiting. c. Money laundering. d. Lapping. e. None of the above

B

In a wrongful discharge case, an employee may be required to mitigate the wage loss. This means that the employee must: a. Take any job he or she can find. b. Take a similar job to the one he or she lost if one is available and include that information in the lost wages component of the damage calculation. c. Discount wages at the prevailing discount rate. d. Not include more than 10 years in the project wage loss category. e. None of the above.

B

The Federal False Claims Act: a. Was first enacted during the Civil War. b. Establishes special measures of fraud for use in cases involving contracts with the federal government. c. Requires whistle-blowers to make it work. d. Is an extension of federal antitrust laws.

B

The U.S. Department of Labor: Bureau of Labor Statistics tables on "Worklife Estimates: Effects of Race and Education" are used by forensic accountants and others to adjust damage estimates in cases for: a. The probability of being unemployed but not the probability of being alive. b. The probability of not working as long as expected because of such things as health problems, possible accidents, probability of death, and the probability of becoming disabled. c. Issues such as weather the employee has a union job or a non union job. d. Racial discrimination issues.

B

What is not a major phase of litigation? a. Discovery. b. Cross-complaint. c. Pleadings. d. Outcome. e. None of the above.

B

Which item would not be demonstrative evidence? a. Loss profit calculation exhibit. b. Testimony of the accounting expert. c. Video of a robbery. d. Diagram drawn on a chalk board. e. All of these are demonstrative-type evidence.

B

Which of these does not have privilege? a. Attorney-client. b. Expert witness-client. c. Physician-patient. d. Husband-wife. e. Clergyman-parishioner.

B

Which statement is false? a. Circumstantial evidence does not prove an issue directly. b. Direct evidence is always more compelling than circumstantial. c. A party who has the burden of proof also has the burden of producing evidence. d. The burden of proof in a civil trial is the preponderance of the evidence. e. None of the above is false.

B

Misappropriation of inventory may be detected by one of the following: a. Analyzing the year-end bank reconciliation for outstanding checks. b. Calculating and analyzing the gross profit margin. c. Reconciling the accounts receivable subsidiary ledger to the general ledger. d. Increasing the integration of technology into the business process. e. None of the above.

B Gross profit margin is a financial metric used to assess a company's financial health and business model by revealing the proportion of money left over from revenues after accounting for the cost of goods sold (COGS). Gross profit margin, also known as gross margin, is calculated by dividing gross profit by revenues

Cost behavior refers to: a. How managers behave in response to cost data. b. How costs change with respect to management decisions. c. How businesses behave in connection with cost changes. d. How costs change with respect to changes in the volume of activity.

D

Game theory and strategic reasoning concepts may be used to detect fraud by getting: a. Auditors to engage in strategic reasoning by considering the types of fraud that management might perpetrate and how these frauds might be concealed from the audit. b. Auditors to gather new, unusual, or random audit evidence not easily anticipated by management. c. Auditors to develop audit strategies that are unpredictable, especially with regard to the nature of their evidence. d. All of the above

D

If an employee is totally disabled in an accident, and the victim states that she planned to work until the age of 65, the expert should: a. Use the stated retirement age of the accident victim. b. Use government tables on life expectancies to adjust the damage estimate. c. Stated or expected average work lives have no use in performing damage calculations in this type of case. d. Use government data on expected work life to adjust the damage estimate.

D

In a wrongful discharge case, common components of the damage measurement would include: a. Lost wages, employer's FICA payments, vacation and holiday pay, and health insurance. b. Lost wages, the value of lost household services, and employee education programs. c. Lost wages, health and life insurance payments by the employer, and overtime premium on scheduled weekly overtime and the value of lost household services. d. Lost wages, health insurance payments by the employer, employer paid educational programs, and employer paid recreation programs.

D

In order for damages to be assessed, the court must find: a. There is liability in the case. b. One of the parties is really bad. c. Criminal violations have occurred. d. Both a and c. e. None of the above is correct.

D

Jim Company sold assets to Fred Company with an alleged value of $2,400,000. Jim Company paid $2,100,000 for the assets. The actual value of the assets was $1,700,000. Using the "out-of-pocket" damage loss rule, the fraud damages would be: a. $1,700,000. b. $2,400,000. c. $700,000. d. $400,000. e. None of the above is correct.

D

Kickbacks commonly occur in all of the following except: a. Construction and property management companies. b. Shipping department in which a customer pays an employee to ship a higher quality of goods than ordered. c. Purchasing agent in charge of awarding contracts. d. Accounts receivable department records returns. e. None of the above

D

The following information pertains to Adena Company: Sales price per unit $90.00 Variable cost per unit $55.00 Total fixed costs $250,000 After-tax income $48,450 Tax rate 40% Unit sales volume for the company must have been: a. 8,527 b. 7,149 c. 6,014 d. 9,450 e. None of the above

D

Two major theories of damages are: a. "Out-of-pocket" and "reasonable certainty." b. "Benefit-of-the-bargain" and "reliance." c. "Benefit-of-the-bargain" and "lost profits." d. "Out-of-pocket" and "benefit-of-the-bargain." e. None of the above.

D

Typically the value of lost household services would be included in the damage estimates in all types of tort cases except: a. Wrongful death cases. b. Accidents causing total disability cases. c. Work-related accidents that cause serious partial disability. d. Wrongful discharge cases.

D

Discuss what is meant by the discovery process.

Expert witnesses are expected to answer questions from opposing counsel at a deposition. At a deposition or examination before trial in some states, which takes place outside a courtroom, witnesses (known as the despondent) are required to answer oral questions under oath. The rules for depositions vary from state to state, but the Federal Rules of Civil Procedure Rule 30 cover disputes in the federal courts in all 50 states. If a report is required from an expert, a deposition may not be conducted until after the report is provided under FRCP 26(b)(4). An expert may receive a notice of deposition subpoena, because if an expert does not receive a subpoena and fails to show up for the deposition, the attorney can be responsibile for court costs.

What is the difference between Frye and Daubert standard?

Frye is no longer used in federal courts and only 6 state courts still use it. Frye standards allow judges to refer to their peers theories or and/or techniques to determine if the expert witness work is accepted in the professional community. The Daubert standard forces the trial judges to ensure that the scientific testimony is relevant and reliable.

Briefly describe the legal framework for damages. What must be proved in order for a plaintiff to prevail in seeking damages?

In general the injured party in a case must prove that the other party in the case is liable for the damages, and the injured party must be able to demonstrate that he/she suffered damages as a result of the actions or lack of actions of the defendant in the case. Proving this usually requires proof of (1) proximate (direct) cause, meaning that the damages caused was a direct result of the offending party's actions or lack of actions; (2) reasonable certainty, meaning that the injured party is reasonably certain to have earned the damages except for the liability of the other party; and (3) foreseeability, which states that a prudent person looking into the future would be able to see the damages resulting from the offending party's actions or lack of actions.

Discuss privileged information.

Individuals within certain protected relationships (such as attorney-client, doctor-patient, husband-wife, work-product, and priest-penitent) cannot be forced to disclose on the witness stand statements made during the course of their relationship. Such statements are referred to as privileged communications. The nature, extent, and application of the rules of privilege can vary widely from jurisdiction to jurisdiction. Each privilege represents a policy determination for that jurisdiction.

Describe the nature of intellectual property. What are the challenges for forensic accountants working on intellectual property cases?

Intellectual property is a broad group of intangible assets that primarily are composed of legal rights that are provided by law to ensure that those who create intellectual property can reap the rewards of their efforts. Common examples of intellectual property are patents, copyrights, trademarks, and licensing agreements. Intellectual property creates a number of challenges in that they are not tangible assets and the owners of such property may not even know that others are using their property without permission to do so. Each type of intellectual property has its own characteristics and as such creates challenges for forensic accountants when asked to assess and prove damages in a case. For example, violations of copyrights that are registered with the U.S. Patent Office may have statutory damages spelled out for such violations, whereas, non-registered copyright violations may require the forensic accountant to calculate actual damages. Trademark infringements typically require the computation of damages by evaluating the harm that was done to the trademark owner (i.e., lost profits, lost trademark value, lost customers, etc.). In a patent infringement case, forensic accountants attempt to determine the lost profits, lost market share, lost customer base, or other harm that was done to the patent holder by the patent infringement.

Describe what is meant by "developing a theoretical framework for damages". Why is this important for an accounting expert witness?

Many accounting expert witnesses create and use damage models that are based on accounting concepts and theories that are relevant to the issues raised by the case. . Depending on the issues in a case, virtually any accounting concept may be an important and relevant in evaluating damages. The expert selects those concepts that are most relevant given the case issues to support and explain the expert's damages. Accounting expert witnesses use their knowledge of accounting and financial issues, to enlighten the court about accounting issues that otherwise might be misunderstood or voewed incorrectly absent the information provided by the expert. Because different accounting experts on opposite sides in a case often arrive at different views of what the damages are and how the damages should be calculated the court is left with many questions about which expert is correct and who has used logical well supported methods to arrive at their damage estimate. By presenting and explaining the theoretical framework that the expert used in arriving at the damage estimate, the court may have a much clearer view of the quality of the expert's damage estimate. The theoretical framework can provide structure to damage deliberations, so that the court has some accounting foundation or framework to intelligently evaluate competing damage estimates

What are the approaches to damage calculation

Out of pocket method & benefit of the bargain method

What are the six major phases of litigation

Pleadings Discovery Pre-Trial Conferences Trial Outcome Possible Appeal

Before and after method

Takes Sales or sales growth before the and compares to the comparable figures afterward

Benefit of the Bargain

The damages include money invested, increased costs, lost profits, and decreased value of the invested (Alleged Value-MV)

The U.S. Department of Labor Bureau of Labor Statistics publishes tables on "Worklife Estimates." The table provides the average expected remaining time in the work force for individuals with various demographic characteristics. If a person 40 years old was seriously injured in a work-related case and that person stated that he/she planned to work to the age of 65, why would a forensic accountant not merely accept that statement and use it in calculating damages?

The individual in this case was seriously injured when she/he was 40 years old. The person's statement that she/he intended to work until the age of 65 is common but often not possible/practical. In a 25-year period, it is quite possible that a worker will have health problems, become injured in a non-work related accident, get laid off, pass away, or suffer some other event that precludes the employee from working to the age of 65. The U.S. Department of Labor Bureau of Labor Statistics publishes tables on "Worklife Estimates." These tables take all of these possible events and the likelihood of them occurring into account in preparing the Worklife Estimates tables. As a result, the statistical data provides those who estimate damages with more realistic measures of how long a person would remain in the workplace absent the unexpected event that caused the tort.

Dave Robinson was seriously injured in an accident while working at a manufacturing plant where he had been employed for 15 years. He was 45 at the time of the accident. His doctor has stated that Mr. Robinson is permanently disabled and will not be able to work again. He has sued the company for damages. Describe what the components of his damage claim will most likely include. If the defendant in the case alleges that Mr. Robinson is only partially disabled and has some ability to work, what impact will that have on the plaintiff's expert report?

The major components of Mr. Robinson's damage claim will include his lost wages, his lost employee benefits, the value of his lost household services, and any other employment related benefits that he might have lost as the result of his injuries. Any wages or benefits that his employer would have paid had Mr. Robinson been able to continue working will be included in the damage calculation. These amounts will be computed with expected growth rates for each item over his expected remaining work years. The damage amounts should be discounted back to their present value. The time period covered by the future earnings should be based upon his expected worklife as described by U.S. government statistics. If the plaintiff incurred any work-related expenses such as union dues, commuting expenses, or special shoes or clothing, the cost of those items should be deducted from the damage amount, because they represent cost savings that Mr. Robinson will experience because he is not working. If Dave Robinson's injuries reduce or eliminate his abilities to perform the household services that he provided before the injuries, the value of those services should be included in the damages.+ The expert witness for the plaintiff will use the description of the severity of Mr. Robinson's injuries that the plaintiff's doctors and lawyers will be asserting at trial in estimating the damages in the case. The plaintiff's expert should, however, be prepared to address questions at deposition or at trial in cross examination about the impact of his/her damage estimates if the plaintiff's doctor's assessment of the severity of injuries are incorrect

Discuss direct and circumstantial evidence.

There are two basic types of evidence: direct and circumstantial. Although the media often deride circumstantial evidence, the law does not value it any less than direct evidence. Direct evidence is evidence that directly proves a fact at issue, without the need for any inference or presumption. The most common form of direct evidence is testimony based on witness's personal knowledge or observation of facts in controversy. Circumstantial evidence is evidence from which a fact at issue may be proved indirectly. Think of the difference between the two types of evidence this way. Suppose, during the night, it snows around your house. If you wake up during the night and see it snowing, that is direct evidence. However, if you sleep during the night and only observe the snow the next morning, that is circumstantial evidence.